Comparable Alternatives, Cost Effectiveness, and Clinical Trial Data: The Medicare Prescription Drug Bill Changes the Reimbursement Landscape

Originally published March 18, 2004

The watershed enactment of the 415-page Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) this past December provides pharmaceutical and biologics manufacturers with a series of new opportunities and challenges to provide prescription drugs to more than 40 million Medicare beneficiaries. Most of the popular press has rightfully focused on the cost of the drug benefit to seniors, with analysis aimed at premiums, co-payments, doughnut holes and first dollar coverage. More recently, the White House acknowledged that the original 10-year cost estimate of $400 billion to administer the benefit was undervalued by more than 25 percent.

But there is much more to this landmark legislation for pharmaceutical and biologics manufacturers than the financing and cost of the drug benefit. And there is an issue with perhaps even greater long-term financial and business planning implications than the much-studied transition from Average Wholesale Price to Average Sales Price faced by pharmaceutical and biologics manufacturers between now and 2006.

Buried deep in the MMA is a provision, Section 1013, authorizing the Secretary of Health and Human Services to conduct and support outcomes research to help the Centers for Medicare and Medicaid Services (CMS) make well-informed coverage and reimbursement decisions. More specifically, this outcomes research, which would likely take the form of comparative clinical trials, is intended to help CMS decide how health care items and services, including prescription drugs, are "organized, managed and delivered." ¹

To fully appreciate the impact of Section 1013, it is important to understand that CMS and the U.S. Food and Drug Administration (FDA) have two very different regulatory missions when it comes to promoting and protecting the nation’s health. The FDA is charged with determining that drugs, biologics and medical devices are safe and effective for their intended uses.² With the FDA’s approval or clearance, the manufacturer is permitted to market and sell its product in the United States.

Whether the Medicare program, as the nation’s single largest health care insurer, is going to cover and pay for the use of the FDA-approved product turns on whether CMS deems it to be medically necessary. CMS’ mission, which it notes is different than that of the FDA, is authorized by the Social Security Act. The statute reads:

No payment may be made under [Medicare] for any expenses incurred for items or services [that] are not reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member…³

What is "reasonable and necessary" or what constitutes "medical necessity" has not been well defined by the agency in regulation. Yet, CMS has been adamant that the controlled multi-centered clinical trials that sponsors conduct for FDA-approval purposes often do not generate the data it needs to judge whether the new item or service is medically necessary to treat the Medicare population in a clinical setting. Accordingly, CMS seeks different data generated pursuant to a clinical trial design that more closely mirrors the way health care services are delivered to the Medicare population.

The concept of comparative clinical effectiveness and outcomes data, espoused in MMA, has been circulating through the CMS bureaucracy for many years. It is one that the medical device industry has been grappling with CMS for more than a decade. Its roots can be found in the industry’s debate with CMS dating back to the late 1980s as to whether cost-effectiveness was an appropriate criterion for CMS (then Health Care Financing Administration) to use in making coverage and reimbursement decisions.

During that time period, HCFA’s process was not published and decisions were made without any public involvement. Forced by a court order to define its coverage decision-making process⁴, HCFA published a Proposed Rule in 1989 that it subsequently withdrew. It did so as a result of the political firestorm it created by attempting to introduce the concept of cost-effectiveness into its coverage decision-making process.⁵ The rule never was published in final form.

Medical device manufacturers are not immune from the reach of Section 1013. And despite the likely debate and modifications to the drug benefit over the next several years, this provision will probably remain intact, absent a concerted lobbying effort by the affected industries.

The importance of this provision is not lost on CMS Administrator-designate Mark McClellan. Tapped by the Bush Administration on February 20, 2004, to relinquish his role as FDA Commissioner to oversee the implementation of the MMA, Dr. McClellan (both a physician and an economist) touched on the topic in his farewell statement to FDA employees, addressing the challenges of implementing this landmark legislation:

"… Taking advantage of this unique opportunity [to safely lower drug costs for seniors and persons with disabilities requires many urgent steps, including those] ... to improve quality of care [by] … developing better evidence on safety and effectiveness of medical treatments, and providing more useful information to patients and health professionals."⁶

The key elements of Section 1013 can be summarized as follows:

• To improve the quality, effectiveness and efficiency of health care delivered through Medicare, Medicaid and the S-CHIP programs, $50 million is authorized in Fiscal Year 2004 for the Agency for Healthcare Research and Quality (AHRQ) to conduct and support research with a focus on outcomes, comparative clinical effectiveness and appropriateness of health care items and services (including pharmaceutical drugs), including strategies for how these items and services are organized, managed and delivered

• No later than June 8, 2004, the Secretary shall establish an initial list of research priorities (including those related to prescription drugs)

• These priorities may include health care items and services which impose a high cost on Medicare, Medicaid or S-CHIP, including those that may be underutilized or over utilized

• No later than June 8, 2005, the Secretary shall identify options to disseminate in a timely fashion outcomes, quality of patient care, clinical data and patient-reported outcomes, which could include voluntary collaboration with private and public entities

• No later than December 8, 2005, AHRQ shall complete its evaluation and synthesis of available scientific evidence related to the initial list developed by the Secretary, which shall be made available to the Medicare program, other health plans, and the public

• AHRQ shall not mandate national standards of clinical practice or quality health care standards

• CMS may not use data obtained through this provision to withhold coverage of a prescription drug

A couple of points are worth noting. The statutory language on priority-setting, referring to the "initial list," suggests this will occur on a repeated basis, most likely annually. It is apparent from the statute that AHRQ’s initial effort must focus on evaluating and synthesizing available data related to the identified priorities. Presuming a paucity of relevant data as contemplated by the provision (hence the need to authorize this provision in the first instance), it is just a matter of time before CMS asks AHRQ to conduct and support comparative clinical effectiveness research.

It is also worth noting that the statutory language prohibiting CMS from using this section to deny coverage is limited to prescription drugs. Medical devices are not expressly exempt from being denied coverage. Perhaps a technical correction to the legislation would be in order here. It is arguable whether CMS would be violating the statute if it covered a prescription drug but set a reimbursement rate low enough to in effect be making a de facto non-coverage decision.

In recent meetings with interested stakeholders, AHRQ officials have been quick to point out that "cost-effectiveness" is a phrase not to be found in the statute. While this is a true statement, it is difficult to deny that cost will be an important factor in CMS’ coverage and reimbursement decisions flowing from this provision. As noted above, the initial priority list may include "items and services which impose a high cost" on the federal programs. The stated purpose of the provision is to develop strategies based upon the data generated to improve the "efficiency and effectiveness of such programs, including the ways in which such items and services are organized, managed and delivered." It is difficult to imagine how this goal cannot include cost-effectiveness as an essential element of the coverage and reimbursement decision-making process.

This conclusion is supported by the public record leading to the passage of the MMA. The prescription drug industry may be uncomfortable with this implication, but other industries more familiar with CMS have come to know the agency’s posture. As industry stakeholders, primarily medical device manufacturers, became more attuned to the importance of CMS’ role in their business planning, they became painfully aware that the agency’s coverage process was done behind closed doors without any meaningful opportunity for stakeholder participation. Following the agency’s first significant foray into the cost-effectiveness battle via its 1989 Proposed Rule, CMS hunkered down and sat on its proposal, consistently going on record that cost was not an element of its coverage decision-making process. For example, during a December 27, 1996, ABC News Nightline broadcast, then-HCFA Administrator Bruce Vladeck maintained that the agency’s coverage decisions were not financially driven. Specifically, he stated that money is "truly not an issue for us. We are obligated by law to pay for all services that are necessary and appropriate for Medicare beneficiaries."⁷

Interestingly enough, just four months later, in April 1997, Vladeck testified before Congress at a hearing to explore the agency’s coverage decision-making process. That was the first time CMS floated the idea of "comparable alternatives" to judge the medical necessity of a health care service or item.⁸ When the congressionally mandated report was published in 1998, it confirmed what Vladeck had testified to a year earlier. Defining the concept of comparability, that report stated:

Comparability applies when the evidence is sufficient to allow comparison of the relevant costs and effectiveness of two or more technologies that are closely related in terms of being used for the same diagnostic or therapeutic purpose. Services that meet the demonstrated effectiveness and appropriateness criteria will be covered under conditions dictated by the evidence. Comparability is an additional criterion which allows for refining coverage/payment decisions in cases where services are found to be more costly, but no more effective than the closely related alternatives. When such a finding is made, the service may be covered and paid at the rate of the lower cost alternative, or limited to specific patients or conditions for which it has been found more effective than the alternative services. The objective of this criterion is to assure value for the Medicare program and its beneficiaries.⁹ (emphasis added)

Consistent with the ideas reflected in this report, from the late 1990s to date, CMS has been promoting the notion of "evidence-based medicine" as the mechanism to make informed coverage and reimbursement decisions. The agency has identified prospective randomized clinical trials as the gold standard against which to make these decisions. Putting "comparable alternatives" head-to-head in such a study design would give CMS optimal results to make its judgments.

The problem is, as even HHS officials recognize, these trials are costly and time-consuming. In the case of new drugs coming to market, clinical trial sponsors are not going to be eager to engage in these types of trials as a predicate to reimbursement, particularly when they have already invested many years and hundreds of millions of dollars to obtain FDA approval. This is a very different dynamic than those instances when pharmaceutical companies choose to conduct a pharmaco-economic post-approval study for marketing purposes. It remains to be seen how CMS would manage this endeavor for those drugs and biologics it already reimburses through the federal programs.

Recognizing the absence of incentives in this arena, top level CMS and AHRQ officials co-authored an article appearing in the September 2003 issue of the Journal of the American Medical Association that is amazingly similar in its thesis to the design of MMA Section 1013.¹⁰ The authors call for "practical clinical trials" or PCTs to make up for what they refer to as a lack of "high-quality scientific evidence to support clinical and health policy choices."¹¹ PCTs are defined as "trials for which the hypothesis and study design are formulated based on information needed to make a decision."¹² More specifically, the authors indicate that the most distinctive features of PCTs are that "they select clinically relevant interventions to compare" as distinguished from explanatory clinical trials that are designed to "maximize the chance that some biological effect of a new treatment will be revealed by the study."¹³

The authors acknowledge that the supply of PCTs is limited because the major funders of clinical research, namely the National Institutes of Health, pharmaceutical, biotech and medical device companies, do not focus their resources in this area. Sounding very much like the essence of MMA Section 1013, the authors state:

Increasing the supply of PCTs will depend on the development of a mechanism to establish priorities for these studies, significant expansion of an infrastructure to conduct clinical research within the health care delivery system, more reliance on high-quality evidence by health care decision makers, and a substantial increase in public and private funding for these studies. For these changes to occur, clinical and health policy decision makers will need to become more involved in all aspects of clinical research, including priority setting, infrastructure development, and funding.¹⁴ (emphasis added)

The medical products industry, including pharmaceutical, biotech and medical device manufacturers, is now on notice. MMA Section 1013 establishes the mechanism to enable CMS to set priorities to evaluate existing data for expensive items of its choosing, and then call on AHRQ to support and conduct PCTs when it concludes the existing data do not support coverage or reimbursement at the sought-after rate. It is not beyond the scope of this provision for CMS to call on industry to "volunteer" its resources to conduct these trials. If history is any guide, these PCTs will be multiyear and multimillion dollar exercises likely to be conducted in the face of national non-coverage decisions. For example, CMS has touted the National Emphysema Treatment Trial (a collaboration between CMS and NIH) as the model by which it intends to make future coverage and reimbursement decisions, including for items already covered by the federal programs.¹⁵ CMS officials have acknowledged on several occasions that once coverage and reimbursement are extended to a service or item, it is a near political impossibility to stuff that proverbial genie back in the bottle.

Well, the Section 1013 genie appears to be out of its bottle. Unless the major industry associations are prepared to unite behind a legislative solution, pharmaceutical, biotech and medical device manufacturers would be well served to review their business plans and consider, with the advice of qualified professionals, how they may have to redesign clinical trials to satisfy the disparate missions of the FDA and CMS in the most efficient and effective manner possible.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.